Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.
The opinions expressed below are my own
It’s on. The rally is strong and capital flow was heavy today at 115%. The news today was pretty uninspiring again though the macro data was quite positive. A couple examples:
- Nov construction spending (08.% vs 0.5% est & 0.9% prior revised from 1.4%)
- Dec ISM mfg (59.7 vs 58.2 est & 58.2 prior)
- Dec ISM prices paid (69.0 vs 64.5 est & 65.5)
Those are not huge datapoints of interest but they do reinforce the improving growth narrative. These data should not drive the S&P up 15-plus handles and elevate activity as much as we witnessed however. For that reason, I think we’re in sentiment territory.
Call it 401(k) flows or retail fund flows chasing performance after a good period or asset allocation changes… or call it something else. The January Effect is often mentioned as driver of bull markets and it’s been thoroughly studied too. The studies I’ve seen debunk it and the few things I’ve seen that supported it, only suggested a small effect. What’s the truth? Nobody knows but I’m skeptical that something so well anticipated would be a source of excess returns. But I could be wrong.
10 years is not a robust sample but here’s a chart of monthly S&P price returns…. Do you see a January effect here?
I’m getting a little distracted here. To bring us back a little, the key point right now is that the bullish narrative continues. Some say it’s the January Effect, some say it’s something else. The why behind the push higher is not important because there is no real why. There is no new meaningful news. We are driven by sentimental momentum.
How long will it continue? That depends on these questions:
- When’s a real news item going to change the fundamental landscape for investing?
- The sentiment can only persevere as long as the world looks rosy.
- How much capital do the performance chasers have at the ready?
- When the last of the capital gets deployed, the rally will fizzle.
I wish had specifics to those answers.
See you tomorrow,